The Financial Times' league table shows which of Europe's biggest companies have delivered the best returns to investors, writes Martin Dickson

A flurry of merger deals between Europe's bourses in recent months has focused attention afresh on the fact that investors are increasingly viewing the region as a single equity market, and are therefore more keen than ever to compare performance between companies in different countries.

The proposed merger between the London and Frankfurt stock exchanges, announced in May, and a similar link-up between Paris, Amsterdam and Brussels, are being driven in large part by the knowledge that investors want a single trading platform for the largest blue chip European stocks.

And those stocks are the focus of the FT's European Company Performance survey, now in its second year and produced in conjunction with FTSE, the global equity index provider.

FTSE presented awards to the five top-ranking companies at a ceremony in London last night.

The survey ranks Europe's top companies - those that are constituents of the FTSE World index, a leading global benchmark - according to their total returns to shareholders over the past year and the past five years.

Total return is defined as the percentage capital gain (or loss) received by a shareholder over the period, assuming all dividends distributed by the company are immediately reinvested in the company's shares. Essentially, it shows the companies in which it has been most profitable to invest.

The survey is complementary to the FT500 survey, published last month, which ranks companies according to their market capitalisation: the bigger the company, the higher its ranking.

The companies presented with awards by FTSE last night were:

• Gruppo Editoriale L'Espresso, the Italian media business, which was ranked first over one year, with a total return of 600 per cent, and also over five years, with a total return of 6,000 per cent.

• Nokia, the Finnish mobile phone manufacturer, ranked second over five years, with a total return of 3,400 per cent.

• Skandia, the Swedish life assurance company, ranked third over five years, with a return of 2,200 per cent.

• Sagem, the French electronics group, which had the second best return over one year, of nearly 580 per cent.

• CIR, the holding company for Italy's De Benedetti group of businesses, placed third over one year with a return of nearly 350 per cent. CIR has a large holding in the L'Espresso group.

Total return is one yardstick for measuring shareholder value, a concept which has become a central part of investment thinking in the US and UK over the past 15 years and is now spreading across continental Europe.

The idea is that the prime purpose of a company is to create value for its shareholders - the people who own the business and provide it with its equity capital. How that value creation should be measured is a more complex question.

At its simplest, it can be taken to be the rise in a company's share price over a given period and the capital gain that accrues to the investor.

Total shareholder return is a more sophisticated version of this, since it also takes account of the stream of dividends paid out by the company over the period.

Ratios such as these, based on a company's share price, have the merit of simplicity and transparency, but do they adequately measure the value being created for shareholders?

A clear yes answer implies that the stock market is always rational and efficient, encapsulating all the information about a company's prospects that is in the public arena.

Best performing European companies over five years
Company	Country	TSR (%)
Gruppo Editoriale L'Espresso	Italy	6,255.5
Nokia	Finland	3,385.3
Skandia Forsakring	Sweden	2,201.1
Ericsson	Sweden	1,670.7
Securitas	Sweden	1,568.9
Hennes & Mauritz	Sweden	1,284.8
Vodafone Airtouch	UK	1,239.0
Pohjola Group Insurance	Finland	1,170.9
Bouygues	France	1,130.7
Canal+	France	1,067.1
Best performing European companies over one year
Company	Country	TSR (%)
Gruppo Editoriale L'Espresso	Italy	607.0
Sagem	France	578.7
CIR	Italy	348.9
STMicroelectronics	France	318.3
Ericsson	Sweden	310.4
British Sky Broadcasting	UK	250.6
Canal+	France	244.1
Nera	Norway	235.1
KPN	Netherlands	231.4
Bouygues	France	230.8
TSR = Total shareholder return
Source: FTSE International

However, the events of the past six months, with the shares of internet-related companies soaring far beyond most people's expectations of their prospects, while "old economy" stocks have languished, underlines that the market is not entirely rational and can be driven for long periods by fashion and irrational exuberance.

A sharply rising share price may reflect a company's underlying long-term outlook, but it may also ignore weaknesses in its business model - say underspending on research and development - which will come back to haunt shareholders some years down the road.

So it is unwise to rely on shareholder return alone as a yardstick for creating value for investors. Equally, it is worth questioning the vogue for it to be used as a yardstick for executive remuneration. It may encourage managers to take short-term measures designed to boost temporarily their share price.

Several other methods of judging shareholder value have been developed and these are compared with total shareholder return in an article later in this survey on methodology.

None of the methods is perfect. This survey is based on total return because it is straightforward, encompasses a huge amount of valuable information about a company, and answers the question which, for better or worse, is upmost in the mind of most shareholders: what has this company done for me?

But given the volatility of the stock market, it is wisest to judge a company's performance over an extended period, which should help smooth out the effects of investor fashion and point to the sustainability of the group's business model. The five year figures should therefore attract greater attention than the one year data.

Equally, a good company unlucky enough to be in an unfashionable sector may record a total return far behind humdrum companies in a fashionable, fast-growing area.

For example, over the past year the information technology hardware sector as a whole has shown a total return of 212 per cent, while at the other extreme the out-of-favour tobacco sector has had a negative return of 15 per cent.

For this reason, it is arguably more useful to compare companies within a sector with each other rather than the highest and lowest fliers overall. That is why this survey's main table lists companies according to their industry, using FTSE's global classification system.





Technical footnote: The one year return period was March 31 1999 to March 31 2000, while the five year was March 31 1995 to March 31 2000.

The calculation methodology was that used by the FTSE World Index, using actual gross dividend yields. The results were calculated in euros, applying FTSE synthetic calculations on a daily basis before December 31 1998 and actual euro rates after that.